American wheels, Chinese roads

It seems like a sure-fire success story: America’s biggest car brand in the world’s fastest-growing car market. By the time of the financial crisis, China had become General Motors’ saving grace. The company was recording big losses in Western markets as it struggled to combat rising costs and appeal to US consumers. In China, however, GM’s sales rocketed from 100,000 cars in 2002 to 2.3 million in 2010, generating roughly one-third of GM’s global profits.

But there was nothing inevitable about GM’s success in China. In “American Wheels, Chinese Roads,” Michael J Dunne shows how GM achieved its success through a combination of luck and strategy, after navigating barriers to entry, cutthroat competition and unpredictable market demand.

Red, white and Buick

Gaining access to the China market was a feat in itself. The opportunity was clear: Shanghai’s state-owned car company, Shanghai Automotive Industry Corporation (SAIC), was looking to expand into a second JV after its venture with Volkswagen. But competition was tough. US car companies are used to being lobbied by governments to set up manufacturing plants in their state or city, but SAIC turned the game on its head. It created a race between Toyota, Ford and GM to invest hundreds of millions of dollars.

The incentive worked for Ford and GM, due partly to the promise of the local market, but also because of their fierce rivalry. “For the leadership at GM, the mere idea of being beat by anyone at Ford anywhere at any time was simply intolerable,” Dunne writes. The result was finalized in November 1995: SAIC and GM invested a staggering US$700 million in a plant to make the Buick Century and the Buick GL8 minivan in Shanghai.

GM won the bid in part because of its products. Though Buick in the US was confined mostly to the silver-haired crowd, in China the car was still remembered as the king of the road in 1920s Shanghai. Chinese consumers liked the old-style American cachet and – in a country where chauffeurs remain popular – the roomy back seat.

GM also bested Ford because it pledged not to withhold help or technology from the JV, as other foreign car companies such as Beijing Jeep were doing in China at the time. SAIC’s mission was leading China to build a car it could call its own, and GM promised to help them do that.

Round two

But the race had only just begun. Just as GM secured the license to produce a full-size sedan in China, company executives found out that, across town, Volkswagen had also sweet-talked SAIC into letting it introduce a full-size Santana. Honda then opened a venture to manufacture the Accord, another full-sized car, in Guangdong.

These developments increased the competition for government and SOE fleet purchases, which were still responsible for about 80% of car purchases in China in the mid-1990s. At the time, the key to success “was to get inside China’s protected industry and let the Chinese partners win production orders from the government,” Dunne writes.

Tougher competition gave car companies new motivation to go beyond the government and begin to court a growing market of private buyers. But while Volkswagen and Honda did well with this segment, GM did not. In 2001, more than 50,000 Accords and Passats were sold in China, compared with only 20,000 Buick Centurys.

GM’s China employees realized early on that the reason for their failure among private buyers was the big Buick engine. Chinese were willing to pay for an American classic, but they would not keep reaching into their wallets at the gas pump. Chinese wanted cars that were impressive, affordable and fuel-efficient. Looking around, executives realized that GM had no car in its extensive US product line-up that Chinese people wanted. GM’s American engineers, whose culture Dunne describes as one of “friendly arrogance,” remained opposed to turning the Buick sedan into a “dog” – a Detroit term for a big car with a little engine.

GM ultimately turned to its European unit to manufacture the missing product. It cobbled together the Corsa, a small, four-door sedan with a 1.4-liter engine made by GM’s German subsidiary, and the Buick brand. The car, the Buick Sail, became a big success in China.

The final countdown

GM realized it needed more affordable, fuel-efficient products for the China market. But here the company ran into logistical problems. GM could not build China cars in the West because of the costs, but it was also reluctant to build them in China.

This was partly because Chinese manufacturing operations were inferior to those in the West. But it was mostly because GM would have to split the revenues 50-50 with SAIC if it made a car under its China unit. GM would lose the revenue from shipping parts from its Europe and North American operations to China, and it would also lose sole claim to the intellectual property.

The US car company found a quick work-around. It bought the struggling operations of Daewoo in Korea and used those facilities to produce smaller cars for China. Here too, however, GM faced difficulties. With Daewoo, GM acquired plans to a small, snub-nosed car that it planned to launch in China as the Chevy Spark. But Daewoo workers leaked the blueprints to a Chinese company called Chery. In 2003, months before the Chevy Spark was to be released, Chery launched the almost identical but cheaper QQ that went on to outsell the Spark five to one.

GM used the Korea operations to fill out its China product line in the years that followed. Though it continued to face tough competition and an uncertain market, the company steadily expanded its reach. Like other car makers, it benefited greatly from the government’s new subsidies for private buyers in 2009.

Beyond the Buick

“American Wheels, Chinese Roads” comes across as the quintessential American business yarn, the kind ancient China hands spin over a draft at Shanghai watering holes like Malone’s or Big Bamboo. Dunne’s language is to-the-point but peppered with wisecracks and engaging anecdotes. Car people will go crazy for this book. But “American Wheels, Chinese Roads” is likely to be a helpful read for anyone seeking to understand business in China. It could also be a quick and valuable read for Chinese seeking to understand US business culture.

The book illustrates just how painful breakdowns in communication and conflicts of interest between Chinese and foreign partners can be. Dunne depicts the gamut of China challenges, from finding and working with a Chinese partner (hint: it’s a bad sign when your partner is nowhere to be found) to decoding local consumer preferences (Chinese consumers respect the presence of a waiting list) to the value of “the correct presentation of things.” “So long as you set up your words in a way that appears palatable, anything is possible,” writes Dunne.

The book concludes by pointing out that the China auto story has progressed, but it is far from finished. China’s strategy has been to partner with foreign auto companies and absorb their technology in order to introduce strong domestic brands.

But this has yet to happen.

What China has seen instead is brand proliferation: from around 10 in 2000 to more than 275 available in the country in 2011. Yet foreign brands still represent about 70% of sales. Car companies undoubtedly face a period of consolidation. Meanwhile, demand for cars looks set to slow in China, at least in 2012.

Dunne remarks in the final chapters that the auto industry is only in the third inning of a nine-inning baseball game. Hopefully he is planning a sequel.

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